Is the general rule to use avg. amounts of balance sheet accounts when given 2+ years of data in a problem for ALL ratios or is it specific to certain ratios i.e. turnover ratios/liquidity ratios. Schweser Qbank does not seem consistent in applying an average so I’m getting a little confused and pissed off. thx
I believe that the averages should be used, except for calculations for DuPont System, when year end values should be used.
dea_cfa, my understanding is that averages are used in mixed-ratios, i.e. those involving account items from different financial statements, most specifically the income statement and balance sheet. Recall that the income statement reflects activity that occurred over a period of time, such as the company’s fiscal year, whereas the balance sheet presents assets, liabilities and shareholder’s equity at a single point in time, like the company’s fiscal year end. So by using, say, the average of beginning and ending assets when calculating total-asset-turnover (= sales/avg. assets) , you’re more closely aligning the chronology of the figures. Whereas, in a pure balance sheet ratio, like the current ratio (CA/CL), there’s no need to use averages because all of the figures are already aligned at the same point in time. Hopefully others will chime-in if I’ve missed something here, thanks. Edit: added b/s commentary
“my understanding is that averages are used in mixed-ratios, i.e. those involving account items from different financial statements, most specifically the income statement and balance sheet” “Whereas, in a pure balance sheet ratio, like the current ratio (CA/CL), there’s no need to use averages because all of the figures are already aligned at the same point in time.” I think you hit the nail on the head and it makes perfect sense now…